Oracle's RFID Platform: Next Big Thing?

While Oracle (NASDAQ:ORCL) is not a name one would commonly associate with the consumer retail space, thanks to a recent partnership with J.C. Penney (NYSE:JCP), it now makes an interesting way to get forward edge exposure to the space. Fortunately for Oracle, and thus for its investors, the company can provide this exposure while maintaining its core business with clients like Unisys (NYSE:UIS), rather than the fickle consumers that drive J.C. Penney's bottom line. The J.C. Penney angle, described in more detail below, may give Oracle a first mover advantage if the new technology that brings the two companies together can be successfully deployed. If not, Oracle's enterprise business (also discussed in more detail below) is alive and flourishing.

The Retail Angle

At the recent Brainstorm Tech Conference, J.C. Penney CEO Ron Johnson announced that he planned to completely eliminate cash checkout lines in all of the company's stores by the end of 2013. The first step of the plan is to install a high grade Wi-Fi network in each store that will allow clerks to perform mobile checkout. This model was made popular by Apple (NASDAQ:AAPL) in its Apple Stores. The concept behind mobile checkout is that employees can be out on the sales floor providing proactive service to the public all the way through sale completion. This approach has been very successful for Apple and its band of sales associates that are armed with a mobile device. This step is planned for later this fall, but is only the first step.

The next step of the process, to be rolled out beginning in February of 2013, is to implement an RFID system - which stands for radio frequency identification. Under this system, every item in the store is tagged with an RFID tag that can be tracked by a central computer. When the customer is ready to leave the store, the system simply tallies the items selected without the need for additional scanning. This provides two main advantages to the store: it can significantly reduce losses due to theft and clerks are no longer needed to complete sales. Within the last few years, Wal-Mart (NYSE:WMT) had thrown its support behind the RFID system, but has yet to roll anything meaningful out in its stores. One of the constraints is that each RFID tag cost between $0.07 and $0.10. Mr. Johnson believes that while this burden was too much for a discounter like Wal-Mart that relies on razor thin margins, it will be easily absorbed in a retail clothing environment.

The reason that any of this matters to a potential Oracle investor is that J.C. Penney recently selected Oracle to provide the technology necessary for the transition; the entirety of J.C. Penney's retail platform will now run on an Oracle platform. This is a strategically important position for Oracle for a couple of reasons. If the transition is successful, it is likely that other retailers will want to make a similar transition. By the time that happens, Oracle and J.C. Penney will have encountered, and presumably resolved, most of the potential pitfalls. This will give Oracle a clear first-mover advantage, making securing contracts from other retailers a more straightforward undertaking.

The other reason that this is a strategically important position is that it comes with relatively little risk. If the transition is an utter failure, J.C. Penney will have still paid for the hardware and services it receives. While it will not represent a long-term, recurring stream of income under this scenario, it is a nearly risk-free option on the future. Such opportunities are rare and should be capitalized upon when they present themselves. As such, an investor wishing to gain exposure to this technology within the retail segment who also wishes to minimize his or her risk can buy Oracle stock and get some exposure to this play.

Oracle's Enterprise Business

Should RFID not be the next big thing in retail, Oracle is still thriving with its enterprise business. Unisys recently announced that it was upgrading to Oracle's E-Business Suite 12.1. The new platform is focused on providing simplified regulatory compliance, streamlined processes and increased productivity. Much of this is accomplished by superior handling of payables and receivables, allowing for a higher quality decision making process. The selection and continued loyalty to Oracle by Unisys is an important indicator of the quality of Oracle's business. Unisys is a leading global provider of IT services to enterprise clients. The fact that it continues to rely on Oracle as a backbone for its business is a meaningful show of support.

In addition to the recent upgrade by Unisys, Oracle recently announced the release of NetBeans IDE 7.2. While this will have little meaning for any but those very well versed in programming, it is another overt sign by the company that it is committed to forward progress. The new release allows for faster develop cycles and should improve the quality of the code being produced.

Overall, Oracle is an interesting way to play recent and continuing developments in the retail space. With a trailing twelve month price-to-earnings ratio under 15 and a price-to-earnings over growth ((NYSE:PEG)) ratio under one, the company looks like a solid value at current levels (a PEG under 1.0 is considered attractive). While it may potentially take eighteen months to see how the J.C. Penney transition plays out, adding Oracle to one's core holding could reap significant rewards over the long-run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.